Confusion Cited In Overpayments To Student Lenders

By Amit R. Paley
Washington Post Staff Writer
Saturday, October 20, 2007

Education Secretary Margaret Spellings has acknowledged that the federal government "had some responsibility" for "confusion" over subsidy rules that helped student loan companies reap hundreds of millions of dollars in potentially excessive payments at taxpayer expense.

But Spellings said in a recent interview that she has no plans to pursue a full accounting of the cost of what the Education Department's inspector general termed "improper" payments in a program that guarantees lenders a 9.5 percent interest rate for certain loans even when market rates are much lower. Nor does the department plan to seek reimbursement.

The inspector general concluded last year that the government had overpaid one lender, Nebraska-based Nelnet, $278 million from 2003 to 2005 -- a finding the lender disputes. In addition, a Washington Post analysis of data obtained recently through the Freedom of Information Act suggests that potential overpayments to other lenders from 2003 to 2006 could total roughly $300 million.

Two lenders, the New Hampshire Higher Education Loan Corp. and the Arkansas Student Loan Authority, said they returned millions of dollars in subsidy payments voluntarily after they discovered errors themselves.

"It seemed like they would just pay subsidies to almost anyone without checking at all," said Tara Payne, a vice president of the New Hampshire lender.

The existence and approximate magnitude of the questionable payments has been known for some time, but until now there has not been an estimate of a total. The Government Accountability Office warned three years ago that a failure to shut down legal loopholes could lead the government to pay billions of dollars in unnecessary subsidies.

Although some subsidy payments in the 9.5 percent program are broadly accepted as legitimate, critics have questioned aggressive financing techniques that lenders used in recent years to expand the volume of loans that qualify for the lucrative subsidy. Auditors for Education Department Inspector General John P. Higgins Jr. concluded that some of those techniques failed to meet criteria that would qualify the lenders for payments.

In 2004 and 2006, Congress enacted legislation meant to phase out the subsidy. Spellings went a step further in January, shutting down any future payments of the sort the inspector general had questioned.

But Spellings said she would not pursue reimbursement of any previous payments because rules had not been made clear to the lenders. "The department, I believe, had some responsibility with respect to that confusion," she said in a recent interview with The Post.

Indeed, the subsidy's 27-year history shows that the government at some points sought to restrict the subsidy and at other points stood by while lenders used aggressive financial techniques to maximize profits during years of low market rates.

The program began in 1980 as an effort to help ensure student access to low-cost loans at a time of double-digit interest rates. The government guaranteed lenders a 9.5 percent return on loans financed by tax-exempt bonds.

When interest rates fell, the guarantee became a boon for lenders. Congress pared back the program in 1993 but retained the 9.5 percent guarantee for loans financed with previously issued tax-exempt bonds. It was assumed the subsidies would dwindle and eventually disappear.

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